Share this page with your friends:

Print

Please note: The Frank Talk articles listed below contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.

South Korea Courts Investors with Unbelievable Payouts
May 7, 2018

South Korea ranks first in dividened growth with a 20 percent CAGR in 2018 2019

Call it the news of the year, perhaps even of the decade. For the first time since the Korean Peninsula was divided in 1948, leaders of the two warring nations met in what had the look and feel of a jovial reconciliation between two estranged family members. Kim Jong-un of North Korea and President Moon Kae-in of South Korea made a number of important, though tentative, breakthroughs, including an agreement to denuclearize the peninsula and a pledge to revisit several infrastructure projects that would help bring some economic unity to the two Koreas.

Which the North desperately needs, as anyone reading this knows.

Below is economic development, as measured in gross national income (GNI) per capita, for the two nations since division. The chart looks not unlike the one I shared comparing Cuba and Singapore since their founding in 1959.

Miracle on the Han River 70 years later
click to enlarge

Thanks to rapid growth spurred early on by business-friendly policies, South Korea is today the fourth largest economy in Asia—following China, Japan and India—and the 11th largest in the world. Most of its citizens enjoy a comfortable, middle-income lifestyle and can afford to own many of the popular consumer goods and vehicles manufactured by Samsung, LG, Hyundai and other Korean household name brands.

North Korea, on the other hand, has not advanced in any material way and today has an economy roughly 30 times smaller than its southern neighbor. Its inhabitants routinely suffer great hardship, from famines to a lack of adequate health care.

For now, many analysts are skeptical that this new development will have a huge impact on the surrounding Asian region—in the near term, at least—since North Korea’s economy is small and lacks the infrastructure necessary for rapid expansion. It’s unlikely we’ll see the sort of boom Vietnam experienced after opening its economy up to foreign direct investment (FDI) in the late 1980s. It’s just as unlikely we’ll see unification anytime soon, as that would require the presiding Kim to end the dynasty that began with his grandfather Il-sung.

Nevertheless, all good things must begin somehow, and this is as good a beginning as I can imagine.

 

South Korea Expected to Lead in Dividend Growth

Investors also seem to be taking in the news with a side of skepticism. The Korea Composite Stock Price Index (KOSPI) advanced a little under 3 percent in the three trading sessions following the summit, but since then it’s pared all of those gains.

South Korea is very attractive right now, with stocks trading at cheap valuation multiples relative to those in neighboring countries. Gross domestic product (GDP) growth remains robust, rising 2.8 percent in the first quarter.

The Korean market has a reputation for having a low payout ratio, despite many of its multinationals being flush with cash, but that looks set to change. Pressured by the government to do more to attract and keep foreign investors, the countries’ top 10 firms paid out a record 7 trillion won, or $6.46 billion, to offshore investors last year. Samsung Group ranked first, its payouts rising a massive 45.6 from the previous year to total 3.91 trillion won.

According to CLSA estimates, based on FactSet data, Korea tops the list for dividend growth this year and next. The investment bank is looking for a 20 percent compound annual growth rate (CAGR), which would be a huge improvement over other markets around the globe.

South Korea ranks first in dividened growth
click to enlarge

Will Korea Become the First Cashless Society?

Recently I asked the question: “How long till bitcoin replaces cold hard cash?” The answer is: Sooner than you might think, though I’m using “bitcoin” here as a proxy for all digital currencies.

Cointelegraph reports that the Bank of Korea (BOK) announced that it’s looking into using blockchain technology and cryptocurrencies for all transactions. Such a move, according to the bank, would improve customer convenience and eliminate the cost of producing physical bills and coins.

The BOK has already set up an organization to research digital currencies and the possible ramifications of transitioning to a completely cashless society—something the Korean government has had its eye on since at least 2016.

Cryptocurencies will be used extensively across South Korea by the end of the year

Adoption is happening much faster than expected. Last month, the country’s leading crypto exchange, Bithumb, and Korea Pay Services, a mobile payment service provider, said they would work together to make crypto transactions available at thousands of stores and outlets.

According to the Korea Times, virtual currency payments will be made available at as many as 6,000 store locations across the country in the first half of 2018. By the end of the year, 2,000 more locations will come online.

Chinese Equities Have Outperformed Since 2001

Morningstar reports that, from March 2001 to March 2018, China stocks had the strongest annualized growth among global markets. Over the 17-year period, the MSCI China Index delivered an amazing 12.2 percent in annualized total returns, compared to the MSCI Emerging Markets Index with 10.7 percent and the MSCI World Index with 6 percent.

China stocks beat all other markets
click to enlarge

What I find incredible is that, when the MSCI Emerging Markets Index was created in January 1988, China wasn’t even included. Today, the Asian giant has the heaviest weighting, representing nearly 30 percent of the index.

But the emerging markets index is changing yet again. Until now, the MSCI included only Chinese stocks that are traded on foreign exchanges—Hong Kong or New York, for instance. Starting June 1, domestic, Shanghai-listed Chinese stocks, known as A-shares, will be added for the first time ever. This will give foreign investors greater, and unprecedented, exposure to the world’s second-largest equities market.

The timing couldn’t have been better, as a huge number of Chinese unicorns—private firms with valuations exceeding $1 billion—are expected to raise capital this year through initial public offerings (IPOs), in Shanghai and elsewhere.

According to the Wall Street Journal, around a dozen Chinese companies, with a collective valuation of $500 billion, have been working with banks and investors to roll out an estimated $50 billion in new shares. Of those, the largest by far is smartphone-maker Xiaomi, which is expected to raise at least $10 billion in Hong Kong, the most ever for the exchange.

Manufacturing in China expanded again in April, posting either a 51.4 or 51.1, depending on which source you trust more—the Chinese government or financial media outlet Caixin.    

Chinese manufacturing continued its expansion in April
click to enlarge

 

The Month of May Has Been a Great Time to Buy Gold

On a final note, May is here, and that means we could see yet another excellent gold buying opportunity. In the chart below, you can see the yellow metal’s average monthly returns for the 30-year period and 10-year period. Although there are noticeable differences, in both cases, May was a great entry point ahead of the late summer rally in anticipation of Diwali and the Indian wedding season, when gifts of gold jewelry are considered auspicious.

Average monthly gold returns
click to enlarge

During this May in particular, the price of gold has been feeling the pressure of a stronger U.S. dollar, currently at a 2018 high, and rising Treasury yields.

But as I said in a recent Frank Talk, there are a number of reasons why you might want to consider adding gold stocks to your portfolio, including faster inflation and shrinking supply.

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

The KOSPI Index is comprised of 200 of the largest and most liquid issues traded on the Korean Stock Exchange. The index market capitalization is weighted, meaning that firms with the largest market value have the greatest influence on the KOSPI's returns. The MSCI China Index captures large and mid-cap representation across China H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 153 constituents, the index covers about 85% of this China equity universe. The MSCI World Index captures large and mid-cap representation across 23 Developed Markets (DM) countries. With 1,649 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The MSCI Emerging Markets Index captures large and mid-cap representation across 24Emerging Markets (EM) countries. With 846 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The compound annual growth rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer than one year.

There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time.

The Caixin China Manufacturing PMI (Purchasing Managers' Index) is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 400 private manufacturing sector companies.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 3/31/2018.

Share “South Korea Courts Investors with Unbelievable Payouts”

4 Big Reasons Why You Might Want to Consider Gold Stocks Right Now
May 3, 2018

The price of gold has been feeling the pressure lately from a stronger U.S. dollar, which is at a four-month high, and rising Treasury yields. Nevertheless, the yellow metal eked out a positive March quarter, returning close to 1.3 percent, while the S&P 500 Index posted its first negative quarter since 2015. This tells me the investment case in gold and gold mining stocks remains as strong as ever.

Below are four more reasons why I think you should consider adding gold stocks to your portfolio right now.

1. Gold mining stocks look inexpensive.

Billionaire investor Warren Buffett once said: “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

Compared to the broader equities market, gold mining stocks, as measured by the NYSE Arca Gold Miners Index, look incredibly “marked down” right now. They’re far below the average gold miners-to-S&P 500 ratio of 0.7 for the nine-year period, and nearly as undervalued as they’ve ever been.

Gold mining stocks are incredibly undervalued relative to broader equities
click to enlarge

I believe that for investors with a long-term horizon, this makes gold miners look especially attractive as we await valuations to revert their mean, or average. Hopefully this can be achieved without a significant decline in the S&P.

2. Rising inflation has historically lifted gold prices.

Inflation can be understood as the destruction of wealth. Every time consumer prices head higher, a dollar loses some of its value, whether in your pocket or your savings account. Inflation can also weigh on stock prices, as some investors anticipate it cutting into corporate earnings. They might therefore decide to move their money into other assets.

That includes gold, which has enjoyed a long history of being an attractive store of value during times of higher inflation.  

After being mostly stagnant for several years, inflation looks as if it’s ready to stage a strong comeback, thanks to rising oil prices and new trade tariffs imposed by the Trump administration, among other factors.

But which measure of inflation is most accurate? The Federal Reserve prefers the consumer price index (CPI), but there are others, including the New York Fed’s Underlying Inflation Gauge (UIG) and ShadowStat’s Alternative CPI.   

no matter which gauge you use, inflation is on the rise
click to enlarge

From the chart above, we can surmise that inflation could be highly understated right now. According to the official CPI, prices rose 2.4 percent year-over-year in March. But if we use the Fed’s methodology from 1980, as ShadowStats does, it’s possible prices advanced more than 10 percent from a year ago.

Regardless of which measure you trust the most, it’s clear that inflation has been heating up at a faster pace—meaning it might be time for investors to consider adding to their gold exposure.

3. Gold supply is shrinking while demand continues to grow.

Like most hard assets, prices of gold and other precious metals respond to supply and demand. If supply goes up but there’s little demand, prices tend to struggle to gain momentum. But if the reverse happens—if supply can’t meet demand—prices have a better chance of increasing.

It’s possible we could see the latter scenario in the coming months.

That’s because many explorers and producers went into cost-cutting mode after the price of gold broke down from its record high of around $1,900 an ounce in August 2011. Exploration budgets were slashed, and partially as a result, there have been fewer and fewer large-deposit discoveries.

What this all means is that if gold demand were to spike unusually high, there’s a strong probability that not enough gold would be available. We would expect the metal to be traded at a premium.

gold supply crunch ahead?
click to enlarge

In the chart above, you can see how a smaller number of projects have been added to the pipeline in some recent years, thanks to a decrease in exploration budgets. Meanwhile, demand has continued to grow as incomes rise in emerging markets that have a strong appetite for the yellow metal—India, China and Turkey chief among them.

4. Gold prices have historically tracked government debt—which appears to be increasing dramatically. 

I think what’s also driving gold demand right now are concerns over the U.S. budget deficit and ballooning government debt. The Congressional Budget Office (CBO) recently said it estimated the deficit to surge over $1 trillion in 2018 and average $1.2 trillion each subsequent year between 2019 and 2028, for a total of $12.4 trillion.

Believe it or not, servicing the interest on this debt alone is expected to exceed what the government spends on its military by 2023.

Now, the International Monetary Fund (IMF), in its April “Fiscal Monitor,” says U.S. government debt will continue to expand as a percent of gross domestic product (GDP), even surpassing levels we last saw during World War II.

gold supply crunch ahead?
click to enlarge

This is a cause for concern, the IMF writes, because “large debt and deficits hinder governments’ ability to implement a strong fiscal policy response to support the economy in the event of a downturn.”

You can probably tell where I’m headed with all of this. Savvy investors and savers might very well see this as a sign to allocate a part of their portfolios in assets that have historically held their value well in times of economic contraction.

Gold is one such asset that’s been trusted as a store of value in such times. As I’ve shown elsewhere, gold has tracked U.S. government debt up since 1971, when President Richard Nixon ended the gold standard.

Take the Next Step

Taking all of this into consideration, I believe an excellent way to gain exposure to the gold market is with our Gold and Precious Metals Fund (USERX). USERX seeks capital appreciation and protecting against inflation and monetary instability—concerns many investors might have right now. It also pursues current income as a secondary objective.

I’m very pleased to say that as of March 31, USERX continues to hold its overall four-star rating from Morningstar among 67 Equity Precious Metals funds, based on risk-adjusted returns.

Interested in learning more about the Gold and Precious Metals Fund? Take a deeper dive by clicking here!

 

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com. Read it carefully before investing. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

Morningstar Rating

Overall/67
3-Year/67
5-Year/63
10-Year/45

Morningstar ratings based on risk-adjusted return and number of funds
Category: Equity Precious Metals
Through: 3/31/2018

Morningstar Ratings are based on risk-adjusted return. The Morningstar Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and ten-year Morningstar Rating metrics. Past performance does not guarantee future results. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.)

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver.  The index benchmark value was 500.0 at the close of trading on December 20, 2002. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals.  The weights of components are based on consumer spending patterns. The Underlying Inflation Gauge (UIG) captures sustained movements in inflation from information contained in a broad set of price, real activity, and financial data. The “prices-only” UIG is derived from a large number of disaggregated price series in the CPI, while the “full data set” measure incorporates additional macroeconomic and financial variables. The ShadowStats Alternative CPI-U Measures are attempts at adjusting reported CPI-U inflation for the impact of methodological change of recent decades designed to move the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living.  There are two measures, where the first is based on reporting methodologies in place as of 1980, and the second is based on reporting methodologies in place as of 1990.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Share “4 Big Reasons Why You Might Want to Consider Gold Stocks Right Now”

How Long Till Bitcoin Replaces Cold Hard Cash?
April 30, 2018

$1 trillion worth of u.s. banknotes could disappear by 2028. will bitcoin replace it all?

Bitcoin is back in the news in a big way. The world’s largest cryptocurrency neared $10,000 last week, meeting strong 200-day moving average resistance of around $9,800. Also last week, the 17 millionth bitcoin was mined. Remember, the crypto was originally designed to have a limited supply of “only” 21 million, an attractive feature that should continue to burnish its value as we get ever closer to that ceiling.

It’s no coincidence that the rally we’re seeing right now began soon after Tax Day. Many bitcoin and altcoin investors likely liquidated some of their holdings ahead of the filing deadline to cover capital gains taxes from last year and are now getting back into the trade. Month-to-date as of April 27, bitcoin was up more than 33 percent.

tax season contributed to bitcoin sell-off
click to enlarge

Also moving prices is news that Goldman Sachs and Barclays are both rumored to be working on introducing cryptocurrency trading desks. Similarly, Nasdaq CEO Adena Friedman told CNBC last week that Nasdaq “would consider becoming a crypto exchange over time,” and that “digital currencies will continue to persist.”

As I see it, these are huge steps for the crypto market to take on its path to full maturation and acceptance as an asset class. We’re still in the very early stages, and recent calls that “bitcoin is dead,” not to mention general negativity toward bitcoin in the media, are strikingly premature.

I’m bullish, but I don’t expect bitcoin to test $20,000 again in the short term, especially before July. That’s when G20 finance ministers are scheduled to present their recommendations on how cryptocurrencies should be regulated.

More and More Smart Money Flowing into Cryptocurrency and Blockchain Tech

As I’ve said before, I don’t necessarily see regulation as a major headwind to cryptocurrencies, so long as it’s fair and reasonable. Such rules might even spur some investors, who until now have been watching from the sidelines, to participate.

That includes hedge funds, financial firms and other large institutional investors. A recent Thomson Reuters survey found that one in five firms are planning to trade altcoins this year. Of those, about 70 percent said they would do so in the next three to six months. Clearly, an increasing number of big investors see cryptocurrencies as an opportunity too good to pass up.

More and more money from venture capital firms is also being plowed into startups focused on cryptocurrency and blockchain technology. In the three months through February, the amount of capital flowing into blockchain businesses far exceeded the monthly average of $55 million for the three-year period. Momentum is building.

venture capital funding on blockchain startups picked up in recent months
click to enlarge

And it’s not just “dumb money” making these bets. Bloomberg reports that successful venture capital firm Venrock Associates is ready to start speculating in the space. Venrock, a compound of “Venture” and “Rockefeller,” was founded in 1969 by members of the wealthy Rockefeller family, and it has a stellar track record for investing early in wildly profitable companies, including Apple and Intel.

Bitcoin to Meet Growing Demand for Alternative Payment Systems

One of the most bullish crypto participants right now is venture capitalist Tim Draper, an early investor in Hotmail (since acquired by Microsoft and renamed Outlook), Skype (also purchased by Microsoft) and Tesla (not currently owned by Microsoft, as far as I know). At a recent Intelligence Squared debate in New York, Draper made the bold claim that bitcoin is bigger than those three ventures combined. “Bigger than the Industrial Revolution,” he said.

Further, he doubled down on his bullish call of $250,000 per coin in the next four years, and predicted that fiat currency will disappear much faster than expected.

“In five years, you are going to try to go buy coffee with fiat currency and they’re going to laugh at you because you’re not using crypto,” he said.

No doubt some of you reading this are laughing at Draper’s hyperbolic claims. But as I’ve written before (here and here), there’s already a global war on cash, incited by some central banks, economists and policymakers.

To try to prevent terrorism financing and drug trafficking, the eurozone has already scrapped the 500 euro note. India did the same with its 500 and 1,000 rupee notes to combat corruption. (See the dramatic dip in the chart below.) And Sweden, one of the first countries to experiment with paper currency, could soon become the first to eliminate it altogether and rely exclusively on electronic payment systems. (Again, notice Sweden’s steady slope toward 0 percent of GDP.)

banknotes in circulation as a percent of nominal GDP
click to enlarge

Here in the U.S., the $100 bill’s days might be numbered, which would affect not only America but also many countries where Benjamins are still in high demand. In fact, more than three quarters of all $100 bills in circulation today live outside the U.S., according to the Federal Reserve Bank of Chicago.

banknotes in circulation as a percent of nominal GDP

Banning large denomination banknotes might be well intended, but ultimately it debases people’s economic freedom. This becomes especially true when low to negative interest rates are also introduced, as they are in Japan. (Today, in fact, the Bank of Japan announced it would keep its short-term rate at minus 0.1 percent.)

The demand for other liquid assets and “alternative technologies for making payments,” as the Chicago Fed puts it, is therefore surging, and I expect digital currencies such as bitcoin and Ethereum to fill that need. Today, U.S. currency in circulation stands at $1.59 trillion. According to one estimate by the Chicago Fed, that figure could sink to as low as $501 billion within 10 years as altcoins become more widely used to make transactions.

In a report for the second quarter, the St. Louis Fed likewise predicts a rapid transition from cash to cryptos:

In the near future, a close cash substitute will be developed that will rapidly drive out cash as a means of payment. A contender is Bitcoin or some other cryptocurrency. While cryptocurrencies still have many drawbacks… these issues could rapidly disappear with the emergence of large-scale off-chain payment networks (e.g., Bitcoin’s lightning networks) and other scaling solutions. 

Maybe Tim Draper is onto something!

Frank Talk Turns 11 Years Old!

banknotes in circulation as a percent of nominal GDP

On a final note, I’d like to give a huge thanks to all of my readers, new and old, who’ve made my Frank Talk blog such a pleasure to write these past 11 years. If you’re still not a subscriber, you can sign up here and join thousands of other curious investors from around the world.

I also invite you to subscribe to the U.S. Global YouTube page, where we regularly share the latest episodes of Frank Talk Live, Gold Game Film and much more.

Blockchain and Digital Currencies SWOT

Strengths

  • Of the cryptocurrencies tracked by CoinMarketCap, the best performing for the week ended April 27 was Daneel, which gained 769 percent. Last week during an interview, Adena Friedman CEO of Nasdaq, said that “Nasdaq would consider becoming a crypto exchange over time.” Although it is unlikely to launch a service anytime in the near future, this is very positive news for the cryptocurrency market in gaining widespread adoption, writes Coindesk. “I believe that digital currencies will continue to persist, it’s just a matter of how long it will take for that space to mature,” Friedman added.
  • Some of the world’s biggest cryptocurrencies rose again last week, reports Bloomberg. This extends their April rally deep into its fourth week, taking this month’s increase past 75 percent. According to Marc Ostwald, global strategist at ADM Investor Services in London, “The noise from regulators has been far less destructive in recent weeks than since the end of last year, and we haven’t had a big theft from an exchange recently.”

Top 10 Digital Coins Head Past 75 Percent Gain in April Rebound
click to enlarge

  • Walmart Inc. is getting suppliers to put food on the blockchain, according to Frank Yiannas, vice president of food safety and health. As Bloomberg reports, the move would help reduce waste, better manage contamination cases and improve transparency. Another new use for blockchain technology is tracking jewels. From mines all the way to retail stores, four gold and diamond companies – Helzberg, Richline, LeachGarner and Asahi – are developing a network to do just that. These companies will use the TrustChainInitiative, running on IBM’s technology, to prove to consumers that their purchases don’t include blood diamonds or other conflict metals, writes Bloomberg.

Weaknesses

  • Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week ended April 27 was Global Cryptocurrency, which lost 41 percent.
  • Bloomberg reports that some ERC20 tokens, which are based on the Ethereum network, could be susceptible to a bug in the system. These tokens encompass about 90 percent of the $53 billion token market, according to CoinMarketCap. On Wednesday, two exchanges suspended the ERC20 token, with one going back up the same day.
  • Central bankers still don’t seem to agree on cryptocurrencies and how to regulate them, but they do agree that tokens such as bitcoin and Ethereum won’t replace traditional currencies. The IMF wrote in a report this month that, “while they may serve as a store of value, their use as a medium of exchange has been limited and their elevated volatility has prevented them from becoming a reliable unit of account.” Different approaches around the world to regulating cryptocurrencies would mean that the effectiveness of regulation is limited, writes Bloomberg.

Opportunities

  • A litecoin trade is turning heads in the cryptocurrency community, writes Business Insider. In a single trade at the end of the week before last, $99 million-worth of litecoin was sent between two crypto wallets in a single trade. The trade cost only $0.40 and took around 2.5 minutes to complete. Users are pointing out that a similar transaction in traditional finance “would take days to clear, multiple parties to sign off and carry heft fees,” the article continues.
  • The Federal Reserve Bank of St. Louis has conducted a new study breaking down cryptocurrencies and asking some of the biggest questions in the space today, reports CCN.com. The study includes an analysis of the control structure of various currencies and also looks into whether or not central banks will adopt cryptocurrencies as a form of payment. As the article points out, the study shows the bank as stating “we welcome anonymous cryptocurrencies, but also disagree with the view that the government should provide one.”
  • Venrock Associates, a venture capital firm that grew out from the Rockefeller fortune, is setting its sights on investing in cryptocurrencies, specifically blockchain startups. Bloomberg reports that it is looking to invest some in tokens, but mostly in startups before issuing its own cryptocurrencies. David Pakman, a partner at Venrock Associates said that he thinks “this is one of the most transformative tech ecosystems and has the possibility of creating hundreds of companies worth billions of dollars each.”

Threats

  • According to the Mosaic Network, cryptocurrencies’ “number-one problem” is the massive void in reliable research. Of course, there are books, blogs and critical media coverage on the space, but there still remains very little in the way of timely and rigorous 1) fundamental analysis of project teams and track records, 2) quantitative analysis of adoption and community traction, and 3) technical road-map risk assessment, to name a few, the article continues.
  • Many large brokerage firms, such as Merrill Lynch and Wells Fargo, are banning their financial advisors from recommending cryptocurrencies. However, Jack Tatar, who is the co-author of “Cryptoassets” and was a Merrill Lynch financial advisor for almost 10 years, says “these firms will back-track their policies” eventually. Furthermore, Forbes writes that even though brokers can’t trade cryptos for their clients, they’ll go against their employers’ policies and advise their clients to make a personal investment. 
  • According to Coindesk, Capital Group, a financial services company with $1.7 trillion in assets under management has prohibited its associates from investing in initial coin offerings (ICOs) or initial public offerings (IPOs). The code of ethics says that there may be some exceptions to investing in IPOs, with no exceptions for ICOs. The ban could be positive with implications that the firm might invest in ICOs on behalf of their clients sometime in the future.

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The MVIS CryptoCompare Digital Assets 10 Index is a modified market cap-weighted index which tracks the performance of the 10 largest and most liquid digital assets.

The Bloomberg Commodity Index is made up of 22 exchange-traded futures on physical commodities. The index represents 20 commodities, which are weighted to account for economic significance and market liquidity.

MSCI World Index is a capitalization weighted index that monitors the performance of stocks from around the world.

The Bloomberg Barclays Global Aggregate Bond Index is a flagship measure of global investment grade debt from twenty-four local currency markets.

Share “How Long Till Bitcoin Replaces Cold Hard Cash?”

Frank Talk Turns Eleven Years Old!
April 24, 2018

Eleven years ago, U.S. Global Investors launched the Frank Talk blog as a way to share my experiences traveling the world and the investment insights I pick up along the way. After thousands of blog posts, we continue to cover the latest market news and educate investors. We’re one of the few sources online today that strives to take a balanced approach on gold investing, emerging markets and a handful of other topics.

One of our values at U.S. Global is having a “curiosity to learn and improve” and I feel starting a blog was a great tool to help our shareholders understand the nuances of global investing. In fact, my CEO blog was one of the first produced by a mutual fund company. Since the first Frank Talk blog post was published in 2007, it’s now widely read around the world and regularly appears on a number of financial news outlets. Over the years the Frank Talk blog and our other educational content have won many STAR Awards from the Mutual Fund Education Alliance (MFEA).

In the eleventh year of Frank Talk, we decided to challenge ourselves and develop a supplemental video series for our readers. This video series, appropriately named Frank Talk Live, allows me to dig even deeper into the material I write about and connect with viewers on a personal level. In this digital age, we believe it’s important to educate our viewers using a variety of mediums, such as video.

In case you haven’t seen a Frank Talk Live yet, I’d like to share with you the most viewed ones so far:

  • Understated Inflation Could Be Good for Gold – At the beginning of the year I like to give my price forecast for gold, in addition to updating it throughout the rest of the year. In this video I talk about gold and its relationship with inflation.
  • Electric Car Demand Set to Drive Copper Sky High – My good friend Robert Friedland, founder and CEO of Ivanhoe Mines, visited the U.S. Global offices and I shared with viewers his insights on the copper market and how electric car demand might send copper prices soaring.
  • Chinese New Year and Gold’s Love Trade – I like to talk about Chinese New Year every year, since it’s a big contributor to gold’s seasonal trading patterns, which I call the Love Trade.

I invite you to subscribe to our YouTube page to receive notifications when a new Frank Talk Live is released.

Thank you to my loyal Frank Talk subscribers, and welcome to those of you who are new. If there is ever a topic you’re curious to learn more about, please drop a note to editor@usfunds.com.

Happy Investing!

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the links above, you may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more of U.S. Global Investors Funds as of 3/31/2018: Ivanhoe Mines Ltd.

Share “Frank Talk Turns Eleven Years Old!”

Commodities Are Flashing a Once-in-a-Generation Buy Signal
April 23, 2018

Everything is bigger in Texas

Since the commodities supercycle began unwinding 10 years ago, many investors have been waiting for the right conditions to trigger mean reversion and lift prices. I believe those conditions are either firmly in place right now or, at the very least, in their early stages. Among them are factors I’ve discussed at length elsewhere—a weaker U.S. dollar, a steadily flattening yield curve, heightened market volatility, overvalued U.S. stocks, expectations of higher inflation, trade war jitters, geopolitical risks and more.

In addition, nearly 60 percent of money managers surveyed by Bank of America Merrill Lynch believe 2018 could be the peak year for stocks. A recent J.P. Morgan survey found that three-quarters of ultra-high net worth individuals forecast a U.S. recession in the next two years.

All of this makes the investment case for commodities, gold, and energy more compelling than at any other time in recent memory.

Exhibit A is the chart below, which I’ve shared before but recently updated with new data. Relative to equities, commodities are as cheap right now as they’ve been in decades. This is literally a once-in-a-generation opportunity that investors with a long-term view should seriously consider. For perspective, had you invested in a fund tracking the S&P GSCI or an equivalent commodities index in 2000, you would have seen a compound annual growth rate (CAGR) of around 10 percent for the next 10 years, according to Bloomberg data.

Commodities at most undervalued level in decades
click to enlarge

We all know that past performance is no guarantee of future results, but it’s doubtful you’re going to get a clearer or resounding signal that now could be an ideal time to add to your commodities exposure. If you feel as if you’ve been stuck at a traffic light these past few years, just waiting to put your foot on the accelerator, you can breathe a sigh of relief because the light may have just turned green.

Goldman: Time to Overweight Commodities

us steel demand by industry

I'm not alone in my bullishness. In a note last week, analysts at Goldman Sachs wrote that “the strategic case for owning commodities has rarely been stronger.” The bank recommends an overweight position, estimating that commodities will yield at least 10 percent over the next 12 months, with most of the gains being made by crude oil and aluminum.

Whereas crude traders are responding primarily to concerns that output could be disrupted by intensifying conflict in the Middle East, specifically oil producer Syria, aluminum prices have skyrocketed following the imposition of fresh U.S. sanctions against a number of Russian firms. Among them is United Company RUSAL, the world’s second-largest aluminum company, responsible for producing as much as 6 percent of global supply.

WTI Testing $70 Resistance

Since its low of $26 per barrel in February 2016, the price of West Texas Intermediate (WTI) crude has surged nearly fivefold and is currently at its highest level in more than three years. Last Wednesday, oil jumped nearly 3 percent on reports that U.S. inventories had fallen more than expected, suggesting the global glut continues to recede. And on Thursday, WTI tested resistance at $70, a level we haven’t seen since November 2014.

WTI crude surges to highest level since november 2014
click to enlarge

But prices retreated again Friday after President Donald Trump blasted OPEC on Twitter, proving once again how quants comb through social media at lightning speed and use sentiment analysis to inform their trades. “With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!” the president said.

As I shared with you earlier this month, OPEC and Russia are planning to work more closely together to limit output for a number of years, possibly as many as 10 or 20. Such an agreement would help support oil prices—Saudi Arabia, in particular, seeks higher prices to take Saudi Aramco, the world’s largest energy company, public—but it’s likely American shale producers would ramp up production to fill the void. The U.S. is now the number two oil producer in the world, having overtaken Saudi Arabia late last year.

Will We See $3,000 Aluminum?

Aluminum is likewise enjoying a strong rally, jumping sharply more than 23 percent since the White House announced sanctions against select Russian firms and oligarchs in response to the Eastern European country’s alleged interference during the 2016 presidential election. In nine of the past 11 trading days through Thursday, the metal posted positive gains, surging nearly 6 percent on Wednesday alone.

Can aluminum hit 3,000 dollars
click to enlarge

Aluminum soared to $2,715 per metric ton in intraday trading Thursday, the highest we’ve seen since April 2011. The rally may have further to run, writes Goldman Sachs, which forecasts a price range of between $2,800 and $3,000 this year.

Australian-British multinational Rio Tinto and Melbourne-based BHP, two of the world’s top aluminum producers, were both upgraded to “BUY” this week by CLSA, partly in response to rising aluminum prices but also because they maintain strong balance sheets and are expected to generate favorable free cash flow (FCF) this year.

China’s One Belt, One Road Still Needs Biblical Amounts of Materials

Also bolstering the commodities investment story is China’s massive ongoing “Belt and Road” megaproject, also known as the Silk Road Economic Belt. In a note last week, CLSA reminded us that the infrastructure initiative is still in its infancy, expected to be completed by 2049. It will cut through as many as 68 countries across Asia and Europe, affecting an estimated 62 percent of the world’s population. China has already spent approximately $180 billion to complete various projects, but many billions more will go toward building roads, ports, dams, high-speed rail, airports and more—all to “enhance regional connectivity,” as President Xi Jinping put it, and strengthen China’s economic clout.

To give you some scale as to how monumental and historic this undertaking truly is, the graphic below, courtesy of BHP, compares the development to the U.S. Marshall Plan, then one of the most expensive projects in human history. The Belt and Road initiative could eventually cost 12 times as much or more, with total spending estimates ranging between $4 trillion and $8 trillion.

Barrick gold reported lowest quarterly output in 16 years
click to enlarge

Estimates of how much energy and natural resources will be needed during the development phase vary wildly, but I think it’s fair to assume that demand will continue to be supported for some time.

Gold Supply Concerns Highlight It's Rarity

Gold ended last week down slightly, the first time in three weeks it’s done so. It looks as if gold investors took some profits late in the week after the yellow metal came close to breaching $1,360 on Wednesday.

I still believe gold could hit $1,500 an ounce this year on rising consumer and producer prices, which I think are understated. This is more than apparent when you compare the official U.S. consumer price index (CPI) and alternative measures such as the New York Fed’s Underlying Inflation Gauge (UIG). And as Dr. Ed Yardeni points out in a recent blog post, the word “inflation” appeared as many as 106 times during the latest Federal Open Market Committee (FOMC) meeting, a sign that Fed members could be getting more and more concerned about mounting inflationary pressures.

Recent reports also suggest gold production is slowing, which could help support prices long-term. Exploration budgets have been declining pretty steadily since 2012 after the price of gold peaked, and fewer and fewer large-deposit mines are being discovered.

Last week the China Gold Association announced that the country, the largest producer of gold, produced 98 metric tons in the March quarter, down some 3 percent from the same period last year. This comes after total Chinese output in 2017 fell 6 percent year-over-year to 426 tons. Granted, miners have been pressured by Beijing to curtail production as part of the government’s enforcement of tougher environmental protection policies, but the decline in output is part of a downward trend we’re seeing across the board, especially among major producers.

Take a look at the declining quarterly output of Barrick Gold, the world’s largest gold miner. According to its preliminary results for the first quarter, Barrick produced a total of 1.05 million ounces from its 10 projects. That’s only a 2 percent decrease from the same quarter last year, but a far cry from where it was seven years ago.

Barrick gold reported lowest quarterly output in 16 years
click to enlarge

Since the news hit April 11, shares of Barrick are up about 3 percent, even after a Friday selloff.

While some investors might view the lower output as disappointing, others no doubt see it as a reminder that gold is a finite resource, one of the many reasons why it’s remained so highly valued for centuries. As I’ve written before, the low-hanging fruit has likely already been picked, making the task of mining the yellow metal more difficult as well as expensive. Supply isn’t growing nearly as fast as it once did.

And yet demand continues to climb. Not only do the peoples of India, China, Turkey and other countries have a strong cultural affinity to gold—an obsession that will only intensify as incomes rise—but the metal still plays a vital role as a portfolio diversifier in times of economic and political uncertainty.

Franco-Nevada IPO at 10

us steel demand by industry

On a final note, Franco-Nevada, one of our favorite players in the gold space, recently celebrated it's 10- year anniversary as a publically-traded company. As if to commemorate the occasion, the company reported record sales and profit in 2017, not to mention a record $167.9 million in dividends paid—all while staying debt-free.

“I am pleased that Franco-Nevada’s 10th full year since its IPO was its best year ever,” commented CEO David Harquail.      

I’d like to congratulate my good friends Seymour Schulich and Pierre Lassonde, who conceived of the gold royalty model and cofounded the company back in 1983. (As I’ve explained before, Franco-Nevada was the first IPO I worked on as a young analyst in Toronto.) Seymour and Pierre are true rock stars in the world of gold mining, and what they’ve managed to achieve is nothing short of legendary.

Read more about Franco-Nevada’s record year by clicking here!  

The S&P GSCI (formerly the Goldman Sachs Commodity Index) serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time. It is a tradable index that is readily available to market participants of the Chicago Mercantile Exchange. The S&P 500 is a stock market index that tracks the stocks of 500 large-cap U.S. companies. It represents the stock market's performance by reporting the risks and returns of the biggest companies.

The compound annual growth rate (CAGR) is a useful measure of growth over multiple time periods. It can be thought of as the growth rate that gets you from the initial investment value to the ending investment value if you assume that the investment has been compounding over the time period.

Free cash flow (FCF) is a measure of a company's financial performance, calculated as operating cash flow minus capital expenditures. FCF represents the cash that a company is able to generate after spending the money required to maintain or expand its asset base.

The Underlying Inflation Gauge (UIG) includes a wide range of nominal, real and financial variables in addition to prices and focuses on the persistent common component of monthly inflation. The UIG is defined as the persistent common component of monthly inflation.

The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals.  The weights of components are based on consumer spending patterns.

There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 3/31/2018: BHP Billiton Ltd., Barrick Gold Corp., Franco-Nevada Corp.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

Share “Commodities Are Flashing a Once-in-a-Generation Buy Signal”

Net Asset Value
as of 09/18/2018

Global Resources Fund PSPFX $5.37 0.05 Gold and Precious Metals Fund USERX $6.57 No Change World Precious Minerals Fund UNWPX $3.49 0.06 China Region Fund USCOX $9.02 0.15 Emerging Europe Fund EUROX $6.36 0.09 All American Equity Fund GBTFX $26.52 0.12 Holmes Macro Trends Fund MEGAX $20.20 0.08 Near-Term Tax Free Fund NEARX $2.19 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change